Thursday, October 04, 2007

The Dollar's double Asian blow

Vietnam is planning to cut its purchases of US Treasuries and other dollar bonds, raising fears that other Asian central banks with control over two thirds of the world's foreign reserves may soon join the flight from US assets.

Vietnam is seen as weather vane for the bigger Asian powers. Asia together holds over 65 per cent of the world's total. The concern is that once one or two members of the region jump ship, it could set off a broader scramble.

Separately, the gas-rich Gulf state of Qatar announced that it had cut the dollar holdings from 99 per cent to 40 per cent, switching into investments in China, Japan, and emerging Asia. The move can easily be seen as a vote of no confidence in US economic management.

Last month, Saudi Arabia set off jitters in the currency markets when it decided not to cut interest rates in lockstep with the US Federal Reserve, raising doubts about its commitment to the Saudi dollar peg.

Kuwait has already abandoned its dollar peg, fearing that its economy would overheat if it continued to import America's loose monetary policies.

Separately, Iran said it would soon refuse to accept dollars for its oil exports, preferring to be paid in a "more credible currency".

If a number of OPEC suppliers began demand long-term futures contracts in euros instead of dollars, this would have an impact over time.

Hans Redeker, currency chief at BNP Paribas: “OPEC and Asia have been the two blocks funding the US current account deficit."